The goal of the treasury department should be to ensure proper cash is available to prevent mismatches in time, currency and geography. It is not an internal hedge fund seeking to maximize returns.
I was motivated to write this post after observing the involvement of some “financial experts” in the cryptocurrency market who expressed some unusual views on best practices for financial management. Given that I’ve spent about 15 years of my career in the finance function of a large financial institution, I’m probably more qualified than most to comment on this topic. There’s not much discussion on this topic in the cryptocurrency space, so I hope readers can learn something; and I’ve intentionally focused on the basics so that non-experts can understand it.
I’m sure someone reading this will complain that the advice is too “boring” or that my views have nothing to do with cryptocurrencies; but at the end of the day, the goal of a finance department is to manage a company’s finances, for better or for worse, to ensure that there is always Sufficient funds to cover known (and unknown) liabilities. Therefore, from the Treasury’s perspective, “boring” is often the most appropriate strategy. In addition to companies and protocols, the following points also apply to cryptocurrency “whales” with holdings of $10 million or even more than $100 million, who want to reduce risk and create what many see as the ideal generational wealth.
If you google treasury management, you may find a definition full of traditional terms, roughly “the primary objective of treasury management is to plan, organize and control cash assets to meet the financial objectives of the organization”. Simply put, the key objective is to ensure that the company always has cash (or other liquid assets) available to make payments that need to be made, while also working to maximize revenue from cash. The finance department of a large corporation is also involved in other secondary activities such as hedging, debt issuance, etc., but this article will focus only on the primary activity of asset and liability management.
This goal seems fairly straightforward now, but there are a few factors that make it more challenging than it first seems. And for crypto companies, especially pure crypto companies that have no traditional economic business at all, some of these factors can be avoided.
Timing: One of the biggest risks that finance departments have to manage is the timing of when money comes in and goes out.
For example (with no capital inflows), if you have regular monthly payments like salary, there is little use locking up all your cash for a few years to generate more income. On the other hand, if your only known outflow is the annual payment after 12 months, it is inefficient to have all your cash sitting idle. To manage time properly, it is important to forecast the expected inflows and outflows of money over the next year or two, and then build a financial strategy to match it. At least 12 months of critical operating expenses (salaries, utilities, rent, etc.) and some buffer funds should be prepared in a checking account, and the remaining funds should then be arranged according to the specific nuances of specific forecasts.
Currency mismatch: The inflow and outflow of different kinds of currencies.
Imagine a US-based company that makes a product with materials paid for in US dollars, but then sells that product online to UK customers who pay in pounds sterling. The company now has a currency mismatch because it has an inflow of pounds from customers, but an outflow of dollars to suppliers. A good finance department should manage this mismatch, preferably in the most cost-effective way possible. For example, let’s imagine that there is a large time difference between inflow and outflow, and foreign exchange is very volatile, when you want to pay the supplier, the value received from the customer may not cover the full amount, so the need Hedge. In the real world, there are other issues like closed areas (eg India, Malaysia) which make foreign exchange management more difficult. Given the convenience of cryptocurrency exchange, it avoids many similar problems, but it cannot avoid others. For example, a company holds a 12-month salary in ETH, but pays its employees in USDC. If the ETH price drops by 50%, the company now only has 6 months of salary reserves instead of 12 months.
Geography: Differences in financial infrastructure in different countries.
Let’s continue with the “currency” example, but with a slight variation, the company sends the product to the UK and sells directly to the market there through its distribution channel in the UK. The company must pay U.S.-based suppliers in U.S. dollars, but can only receive British pounds from a U.K.-based company. So while making sure GBP gets converted to USD, it’s also being transferred from the UK to the US. This is not difficult given the close integration of banking in the two developed countries, but it can become difficult if one of the countries has a less developed financial infrastructure, or is a “closed area”. Obviously, for a full crypto business, this is not a problem, as the treasury is just a wallet that can be moved from one country to another without restrictions. However, as a crypto business grows, they are likely to end up with real-world offices in one or more countries (thus incurring fees), so this risk also arises.
Of course there are other issues, such as interest rate risk, but I think the three above are the main ones to consider when looking at the fundamentals of financial management.
Putting the above into practice, what does a “good” finance department look like, and if not, what are the red flags?
Imagine two companies receiving $100 million in funding on the same day, either from a traditional funding round, from some kind of token offering, or even NFT minting. We can assume that these companies have more than 20 employees, all paid in stablecoins. To illustrate my point, I’ve deliberately taken the example below to extremes, but the basic logic is the same.
Company A keeps 25% of its cash in accounts of various maturities (but keeps enough funds in short-term accounts to cover operating expenses for the next year or two) and 25% in various large-cap stablecoins (earnings yield), 30% is held in Bitcoin and Ethereum, 15% is placed in other “blue-chip” cryptoassets, and the final 5% is placed in high-risk portfolios (seed rounds, NFTs, etc.).
In contrast, Company B buys back their own tokens with 30% and 60% is spread across 6 different seed rounds, all with vesting periods of 1-5 years (if these are WGT – worthless governance tokens, it would be worse), and the last 10% was used to buy a BAYC for each of the 25 founding employees.
Company A balances risk and reward, and retains its value in both bull and bear markets; perhaps capturing some bull market upside, but more importantly, resisting bear markets. Poor quality assets in their portfolio are limited to 5%, so even if it becomes zero, the impact on business operations is minimal. They also have a significant portion of cash or cash equivalents that can be used to cover operating costs (especially salaries).
Company B has a higher risk. In the event of a major and prolonged downturn in the market, their assets would depreciate substantially, likely rendering the company unable to continue operating. Since there is no stablecoin storage, asset price volatility can be an issue when operating expenses are paid. I think companies that build their treasuries in this way have a much higher chance of failing than what Company A is doing because they seem to be maximizing returns on long-term stability.
Therefore, the above is summarized into a few revelations.
- The Treasury Department’s goal should be to ensure proper cash is available to prevent mismatches in time, currency and geography. It is not an internal hedge fund seeking to maximize returns.
- A significant portion of treasury assets should be kept in cash or a cash-like vehicle for easy access in times of stress.
- Any speculative investments should only be a small part of the overall Treasury portfolio, so if they go to zero, they shouldn’t adversely affect the company’s operations.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/in-the-eyes-of-traditional-financial-experts-how-should-encryption-companies-conduct-financial-management/
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